This cost principle makes costs unallowable that are in connection with the "organization or reorganization" of the "corporate structure" of a business. Unfortunately, these terms are not defined but it would seem this cost principle would apply to the organization of a corporate joint venture or corporate subsidiary SBU. On the other hand, costs related to other organizations that do not change the "corporate structure" or alter the rights of security holders would be allowable if reasonable in amount. These would include a partnership joint venture or an unincorporated SBU.

Individual DCAA auditors may attempt to take a more expansive view making costs of all joint ventures and SBUs unallowable but they should be reminded of the distinctions above that affect the corporate structure and those that do not. Some may also argue that such organization costs are unallowable because they bear no relationship to the work of the contractor under government contracts. This rationale would be clearly inappropriate when formation of these new arrangements help the contractor compete for and perform their government contracts more effectively and efficiently.

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